When music is played on a non-interactive digital service like Pandora, Sirius XM, or cable radio, payment for the sound recording copyright is collected and distributed by SoundExchange, a non-profit performance rights organization. As we detail in our handy “Music and How the Money Flows” chart, this revenue is divided up in a standard formula: 45% goes to the featured artist, 50% goes to the sound recording copyright owner (usually a label), and 5% goes to the AFM/SAG-AFTRA Intellectual Property Rights Distrbution Fund, for distribution to backing players, session musicians, and backing vocalists. We’re fond of this system because it treats all artists equally, ensuring direct payment that can’t be held against recoupable debt to a label, with equitable splits.

But what happens if you’re a self-released artist who doesn’t work with a label, but owns the copyrights to your sound recordings? You are entitled to collect both the artist share and the label share yourself. Unfortunately, many artists don’t know this, and end up missing out on money they ought to be collecting, because they’ve only registered for the artist share. Other artists haven’t registered with SoundExchange at all.

CD Baby, a popular distribution service with a large userbase of mostly self-released artists, recently announced a change to their terms of service that allows them to collect the label share from SoundExchange for their roster of distributed artists. This move was met with some minor controversy, as indeed, artists are entitled to collect that money themselves directly from SoundExchange, without the administrative cut that CD Baby charges. We decided to go directly to the source: CD Baby CEOTracy Maddux answered our questions this week via email.

FMC: Just to put this all in context, how has CD Baby worked with SoundExchange in the past?

Tracy Maddux: We’ve done a number of ‘matching exercises’ in the past where we provide SoundExchange with a copy of our catalog, our artists’ ‘repertoire’ in SoundExchange parlance, and they identify unclaimed royalties. Although we would never see how much an individual artist is owed, we would get an indication of which artists were owed something and an indication of the aggregate amount of unclaimed royalties. We would then send an email to those artists, encouraging them to go and register and collect their royalties.

FMC: What did you learn from those past experiences?

TM: We learned that there were significant sums going unclaimed by CD Baby artists. In our matching exercise of 2011, for instance, SoundExchange identified 12,500 artists owed more than $10 million in royalties. We also learned that artists often don’t register with SoundExchange, even after we educate them on how to do it. They either try but are unable to get through the registration process, or put it off and don’t get around to doing it at all. The sad thing is that after three years, unclaimed royalties are released to other artists (and major labels) in what’s called a ‘pool release.’ We also learned that this is all pretty complicated – artists don’t know that they can also claim label share and supporting artist share if they are self-distributed or represent a band. Or they don’t have a tax ID that they can use to collect on behalf of a performing group, so they simply don’t bother. There are a myriad of reasons that artists don’t sign up. Sometimes it comes down to they just aren’t comfortable providing confidential information, such as their taxpayer ID number, to SoundExchange or don’t feel like they can represent all of their bandmates in a collection process.

FMC: How has CD Baby updated your terms with your member artists as it relates to SoundExchange?

TM: We’ve expanded our administrative rights so we can claim the label share of SoundExchange royalties. We plan to administer these claims only on unclaimed royalties. If the artist is already registered individually or as a label, we encourage that to continue and will not interfere. If an artist is unhappy with our new role as administer, they can either opt out in their CD Baby dashboard, or email us to let us know that they do not wish us to collect.

FMC: Who will not be affected by this policy change?

TM: Artists and labels who are already registered and collecting will not be affected. Artists and labels who specifically direct us not to collect on their behalf will not be affected.

FMC: And who will be affected by this change and how will they be affected?

TM: Only artists who have not registered or who did not register to collect label, or ‘rights owner’ share, will be affected, and only if they have had streams reported and royalties paid to SoundExchange by non-terrestrial, non-interactive streaming services like Pandora and Sirius XM. If there is unclaimed money at SoundExchange earned by CD Baby artists, we aim to collect it and pay it to those artists.

FMC: Why don’t you simply inform artists that they should register with SoundExchange themselves?

TM: We do. Since 2010 we have done several pushes to educate and assist our artists to sign up and collect. We’ve created SoundExchange landing pages and educational materials and of course we utilize our Portland, OR, call center to educate and assist artists one on one. Here are some examples of past campaigns we’ve run to get artists to register: (1, 2, 3, 4)

FMC: Why have you chosen to implement this change as an opt-out service, rather than as an opt-in service?

TM: We have 380,000+ active artists at CD Baby. We have indications that somewhere between 5,000 and 10,000 of them have unclaimed royalties. Administratively, we think it would be extremely difficult and time consuming to communicate and conduct a retroactive opt-in for this type of service. Remember, if artists don’t register and collect within three years, the money gets distributed to the majors.* So we want to be as inclusive as possible.

Since what we’re doing is 1) collecting royalties on the artists behalf, 2) giving those royalties to the artist (less our administrative fee of 9%) and then 3) educating and encouraging the artists who do have earnings to go and register themselves, and collect 100% directly, we think we’re doing the right thing the right way. I’ve seen some crowing by industry insiders that we’re somehow being unfair or unethical (for collecting money that would eventually be distributed in a pool release to their clients), but we just don’t see it that way.

It remains to be seen whether this response satisfies all critics, but it does seem like a reasonable approach to helping direct royalties to the artists who’ve earned them while allowing artists to exercise their full range of options. If you’re interested in asking more questions, Tracy Maddux will be participating in a Reddit AMA on December 18 at 10 AMPST/1 PMEST.

* Note: when SoundExchange distributes unclaimed royalties in a pool release, it happens through a lowering of that pay period’s administrative rate. So it’s not quite accurate to say that the money gets “distributed to the majors”; rather, it’s spread across the entire range of registered artists and rightsholders whose work is performed over that period, proportional to their share of all spins. It is probably true, though, that the major labels collectively end up receiving the largest portion of the sound recording copyright owner share of the money, simply because they presumably account for the largest quantity of spins.